Should-Read: Greg Leiserson: U.S. Inequality and Recent Tax Changes: “Distribution tables provide a first-order approximation to the change in welfare…

…Change in welfare determined primarily by changes outside the agent’s control: mechanical change in tax and changes in relative prices:

  • Behavioral changes have no first-order impact on the well-being of the person changing behavior
    (envelope theorem)
  • Recipe for constructing distribution tables that are informative about welfare:
    • compute change in tax liabilities and relative price effects (i.e. incidence assumptions)
    • exclude behavioral changes reflecting unconstrained, rational choice
    • include other behavioral changes (easier said than done, esp. when there are quantitatively
      important market failures)
  • Converting dollar change in after-tax income into utility requires an assumption about the marginal utility of income (e.g. 1/after-tax income)
    • Conceptual difference between individual or family’s marginal utility and social welfare weights
      used to evaluate redistributive policies
  • Policymakers’ desire for distribution tables may not reflect an ex ante desire for information about
    welfare impacts, but plausible that the desire for tables excluding behavioral changes/sample families is
    an implicit recognition that those changes are different…